When the parent company of Snapchat floated on the US market last week many were surprised when the IPO price was set at $17 which was higher than the revised price range. It turns out that the offer was around 10 times oversubscribed and there was significantly more demand than many had expected. The shares initially increased by more than 30% in the first day of trading subsequently moving further ahead, hitting a high of $28.50 on Friday of last week. However, the last two days have seen the share price fall by 12% and 7% in early trading today. So, has the Snapchat bubble burst already?
Wild swings in initial trading
When you bear in mind that Snapchat now has a market capitalisation in excess of $20 billion but the company is nowhere near making a profit, perhaps alarm bells should begin to ring? While the market capitalisation of Facebook nears $400 million this is a company which is further down the profit line having managed to convert traffic into advertising revenue. There are many ways to interpret the Snapchat membership data but it does seem to have a more active core membership than many other social media companies.
It will be interesting to see whether the shares recover over the next few days after the initial burst and subsequent sell-off. Some analysts believe the shares are currently overvalued and many are comparing them to the early days of Twitter which was floated at $26 a share, hit $44.94 a share in early trading and currently standing at $15.56 per share. Is it possible that the Snapchat share price will perform in a similar manner to Twitter?
Now for the hard work
If you take a step back and look at the situation from a distance, the Snapchat team have managed to raise additional finance which values the company at in excess of $20 billion. This is a phenomenal performance but now the hard work begins, trying to convert active traffic into advertising revenue. Stock markets can be extremely volatile in the short term and we can only hope that the Snapchat management team maintain their focus on the longer term. Until we see the conversion of significant traffic numbers into advertising income streams it may be susceptible to wild swings and derogatory statements from analysts.
The fact that the core management team have managed to get the company from a start-up to where it is today is phenomenal. Even though there are challenges ahead it would be foolish to dismiss their skills which they have shown to great reward over the last few years.
What does this mean for the IPO your market?
At the end of the day despite the disappointing performance of Snapchat shares over the last couple of days it is still well up on its initial float price of $17. Let’s not forget the company was expecting a maximum price of $16 per share just hours before the price was set. This is not a disaster, this is not a mismanaged float this is simply a company which came to the market, saw significant demand and managed to raise additional finance to fund future expansion. Can that really be seen as a failure?